126 Sheridan Company has fixed costs of $2300000 and variable costs are 20% of sales. What...

126

Sheridan Company has fixed costs of $2300000 and variable costs are 20% of sales. What are the required sales if Sheridan desires net income of $400000?

$3375000

$2875000

$13500000

$11500000

Expert Solution

Cost- volume- profit analysis shows the relation of costs- fixed and variable, with sales and profit. When variable costs are reduced from sales we will get contribution margin. From contribution margin if we reduce fixed costs, the result will be net income.

Here, in this question, the correct answer is $3,375,000.

Explanation:

It is given that,

Fixed costs = $2,300,000
Variable costs = 20% of sales
Desired net income = $400,000

Imagine that, sales is 100%. Then variable costs will be 20%. Then contribution margin will be sales less variable costs, 100 - 20 = 80%

Therefore, sales to earn a net income of $400,000 = (Fixed costs + Desired net income) / Contribution margin
= $2,300,000 + $400,000 / 80%
= $3,375,000

It can also be proved by preparing a variable costing income statement.
Sales ......................... $3,375,000
(-)Variable costs.......... $675,000
(20% of $3,375,000)
Contribution................ $2,700,000
(-)Fixed costs.............. $2,300,000
Net income................... $400,000

ekkarill92 answered 2 years ago

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